Smith Settles Patent Suit With Baker Hughes : Irvine Firm Agrees to Pay $95 Million, Less Than Half of Original Judgment

Baker Hughes and Smith International agreed Friday to settle a 14-year-old patent infringement case for $95 million, less than half the $204.6 million that Smith originally had been ordered to pay by a federal judge. The initial judgment was won by Hughes Tool Co., a bitter competitor of Irvine-based Smith.

But as industry analysts had predicted--and as Smith officials confirmed Friday--the prospects for a settlement at a much lower cost to Smith brightened substantially when Baker, then headquartered in Orange, agreed to merge last year with Houston-based Hughes in a deal that gave Baker management control.

Loren Carroll, Smith’s chief financial officer, said the merger “provided the vehicle to eliminate the emotional involvement of 14 years of patent litigation.

“It was always Smith’s interest to settle this if there was a level we could afford,” Carroll said. “But Hughes wanted to put us out of business.” By contrast, he said, Baker executives’ interest in settling the dispute was “strictly financial.”

“I like the $95 million. . . . I’m very pleased,” Baker Hughes President James Woods said Friday. He said he would use the money to pay down Baker Hughes’ $725-million debt.

Antitrust Concerns

Herb Hart, a securities analyst with S. G. Warburg, Rowe & Pittman, Akroyd Inc., said he believes that Baker Hughes, which recently had to sell assets to appease federal antitrust concerns about the merger, was also worried about its image. “I don’t think Baker Hughes wanted to be perceived as trying to force out competitors in its industry,” he said.

The settlement between the two oil service companies was hailed by analysts as extremely beneficial to Smith, which was forced into a Chapter 11 bankruptcy by the initial judgment and whose future had seemed in jeopardy.

With the settlement, Smith officials predicted Friday that their company will be able to file a plan of financial reorganization within 30 days and emerge from bankruptcy by the end of the year.

“I think it is very positive news for Smith. It means they are back in business,” said James L. Carroll, an oil service securities analyst with Paine Webber.

Woods said that under the settlement, Smith must pay Baker Hughes $85 million in cash and $10 million in short-term notes by Dec. 31. He said the settlement agreement will place a 30-day stay on continued litigation over Smith’s infringement of a Hughes drill bit patent. The $204.6-million judgment handed down in Los Angeles by U.S. District Judge Harry L. Hupp early last year has been on appeal.

During the 30-day period, Woods said, Smith will draft a plan of reorganization that will incorporate the terms of the settlement with Baker Hughes.

Woods also said that Baker Hughes reserves an “option of withdrawing from the settlement agreement and pursuing its rights in the patent litigation” if it becomes evident that Smith cannot make its payment by the end of the year.